Canopy Growth (NYSE:CGC)(TSE:WEED) reported its fourth-quarter earnings before the market opened on May 29. For the quarter, the company missed analysts’ revenue expectations by 16.2%, while its EBITDA losses were 15% higher than the expectations. Also, the company’s management withdrew its previously announced timeline for reporting a positive EBITDA. Management cited its restructuring efforts and the COVID-19 outbreak. Investors had high hopes for Canopy Growth especially after Aurora Cannabis (NYSE:ACB) reported an impressive performance for the comparable quarter. So, investors were disappointed to see Canopy Growth miss analysts’ expectations by a huge margin. The stock has fallen 27.2% since the company reported its earnings.
Analysts’ recommendations for Canopy Growth
Canopy Growth’s weak fourth-quarter performance prompted many analysts to lower their ratings and slash their target prices. On Monday, Cormark Securities downgraded the stock from “buy” to “market perform.” Stifel double downgraded the stock from “buy” to “sell.” Meanwhile, CIBC lowered its rating to “neutral” from “outperform.” PI Financial lowered its rating for Canopy Growth from “neutral” to “sell.” Overall, analysts favor a “hold” rating for the stock. Among the 20 analysts, 70% recommend a “hold,” 20% recommend a “buy,” and 10% recommend a “sell.”
Cormark Securities, Stifel, Benchmark, Eight Capital, CIBC, Canaccord Genuity, Piper Sandler, and PI Financial all lowered their target prices after Canopy Growth reported its fourth-quarter earnings. All of the price cuts dragged analysts’ consensus target price down. As of June 1, analysts’ consensus target price was 25.96 Canadian dollars. The target price represents a fall of 10.1% from 28.89 Canadian dollars on May 1. The new consensus target price represents a 12-month return potential of 16.6% from the current stock price.
As reported by MarketWatch, Andrew Carter of Stifel stated that Canopy Growth has the resources to become the market leader in the cannabis sector. However, the resources haven’t produced the results that could make the company a leader in the sector. Carter also said, “We believe course correction will be difficult, expenses will remain elevated, and catalysts for driving enthusiasm will be slow to develop necessitating a further re-rating for the shares.”
Matt Bottomley of Canaccord Genuity is worried about Canopy Growth’s declining market share and higher cash burn, as reported by The Deep Dive. He said that the decline in the company’s adult-use cannabis sales during its latest quarter indicates a decline in its market share. Notably, most of the other companies reported growth. He said that it would be difficult for the company to spend one year in transition, especially when it’s burning cash at a rate of 300 million Canadian dollars per quarter. However, he thinks that Canopy Growth has a strong balance sheet to absorb the losses.
As reported by The Dep Dive, Jason Zandberg of PI Financial said that Canopy Growth missed the surge in cannabis demand amid the lockdown. He said that the market share has declined from highs of 25% to around the high teens. Also, he expects the company to lose its market share more as it goes through a transition.
Canopy Growth’s stock performance and my take
High expectations for Canopy Growth’s fourth-quarter earnings pushed its returns for this year into positive territory. However, the weak fourth-quarter performance dragged the stock down. Canopy Growth has lost 18.5% of its stock value YTD. The stock has underperformed cannabis ETFs. The Horizons Marijuana Life Sciences Index ETF (TSE:HMMJ) has declined by 13.8% during the same period. Meanwhile, Aurora Cannabis (NYSE:ACB), Aphria (NYSE:APHA), and OrganiGram have fallen by 42.6%, 11.5%, and 22.6%, respectively.
I was bullish on Canopy Growth before it reported its fourth-quarter earnings. However, I’m worried about the company losing its market share to its peers. The company might struggle to reduce its expenses and move towards profitability. Canopy Growth also announced that fiscal 2021 will be a transition year. So, I would avoid the stock until there’s some recovery in its sales.